The US stock market has a supply problem brewing over the next several years, Jeremy Grantham’s GMO is warning.
In a quarterly note to clients, the asset manager flagged the risk posed by a coming wave of stock supply, thanks to factors like SpaceX unlocking insider shares, coming mega-IPOs, and secondary issuances.
SpaceX’s stock sales, besides those made by CEO Elon Musk personally, also make up around 1% of the US stock market’s total value.
Meanwhile, OpenAI and Anthropic, which are expected to go public in the near future, make up around 5% of the stock market’s total investable market cap, GMO estimated.
Altogether, equity supply in the US could grow around 5% a year, the firm said, comparing the growth to the historical precedent of equity supply shrinking 1% annually.
“Today’s passive, benchmark-aware, and constrained markets leave fewer buyers willing to absorb new equity supply,” Ben Inker, GMO’s co-head of asset allocation and John Pease, the firm’s head of asset allocation research, wrote in the letter.
“We believe the equity supply already coming to market is large enough to have a meaningful dampening effect on likely returns—perhaps a 20% hit relative to normal over the next year and a half, if history is a decent guide,” the note added.
The coming wave of new stock could also be the catalyst that pops the AI bubble, Inker and Pease said, adding that the market has shown a greater sensitivity to changes in equity supply in recent years.
“In a market as sensitive to equity supply as this one seems to be, prices are likely to turn before the market truly knows that has happened,” they added.
More attention has been paid to rapidly growing supply of publicly available stock recently. SpaceX’s historic $2 trillion IPO drew concerns from analysts about how the wave of stock issuance could impact the structure of public markets and drain liquidity from other parts of the market as investors rush to make room for new mega-cap tech stocks.
It’s been a record-breaking year for IPOs. New public companies raised over $137 billion in the first half of the year, marking a nearly 400% year-over-year increase, according to the Securities and Exchange Commission.
Investors, meanwhile, don’t have much cash on the sidelines. Global equity allocation is sitting near a five-year high, according to Bank of America’s latest survey of institutional investors. The concern among some analysts is that investors buying newly available stock may need to sell some of their existing stock holdings, resulting in broader market weakness.